To be successful at your business,
you need a financial plan, and
a critical part of that is
understanding your cost structure.
Today, we'll talk about the cost
structure, assumptions or
hypotheses that you go under
your canvas so that you can test
them to make sure your financial
model is going to make sense.
And will be a good supporting basis
for your business.
Hi, I'm Steve Morris and I use this
StartupSOS Channel to provide
practical how to advice for first
time entrepreneurs.
The topic today, your cost
structure, documenting those
hypotheses so that you can go
test them.
So this is the last section
to the business model canvas that
will talk about your cost
structure.
And once you understand that,
you're really ready to go ahead and
put together more of a complete
financial plan for your business.
Everything we've talked about in
the business model canvas affects
your cost structure.
Right - everything from your
channel strategy through to your
partnering, your key activities and
key resources.
So you've already done a lot of the
work of thinking through the
different pieces.
Now you need to think through the
different categories of cost.
That's what we'll talk about next.
So for cost structure, first we'll
talk a little bit about strategy and
then the different categories of
cost and then the different
economies.
Economy of scale and economy
of scope that can influence
your cost structure.
So there are two overall strategies
from a cost structure point of view.
One would be costs driven and one
is value driven.
Cost driven would be
if cost is really
a primary part of your business
model. Let's say Costco,
for example, pretty key part of
their model is to deliver low
cost.
So it's especially critical for
them to keep costs under control.
It's critical for every company to
keep costs under control.
But if you're a value
driven company, let's say you're
shooting for more of a premium
pricing, more of a high
value positioning.
Well, you still need,
obviously, to be careful about
costs, but you're really going
to be very focused on creating
so much value that you
deliver a much higher return
on your cost than a cost driven
company. You've got higher prices.
You've got higher margins.
It certainly changes the way you
think about your cost structure.
But again, keeping costs under
control is obviously important for
any company.
So we talk about cost structure.
There are two basic categories of
cost, variable costs and fixed
cost.
Now variable costs are costs
that scale with your production.
So let's say you're building a
physical product. Well there's raw
material, you'll use more and more
of that the more product you make.
And product labor to
to put together the product.
Again you use more of that depending
on how much product you ship.
Even if you're a software company,
there are some variable costs
like server usage fees for
example, the more server power you
need, the more you'll pay.
On the other hand, there are some
costs that are, at least in the
short term, relatively
fixed compared to those
costs that scale with
with production.
For example, salaries and rent
day today, you know, your salaries
aren't going to change and your
rent's not going to change based on
how many products you shipping.
Over the long run, clearly, they do
change. As you grow the business,
your volume grows.
You're hiring more people, you're
using more facilities.
Your rent's going to go up.
OK, that's in the long term.
In the long term, pretty much all
costs are variable.
But in the short term, things like
salaries and rent you can think of
as more fixed cost
items compared to the costs
that scale with production.
Now, we talked about economies, two
kinds of economies to think about
and about whether they apply to your
business. One would be economies of
scale and the other would be
economies of scope.
Scale.
Are there economies
that you'll get as your volume
increases?
For example, as you buy more and
more raw material from somebody,
maybe you'll get a better deal
on that raw material.
If you're using more and more server
time, maybe you'll get
cheaper and cheaper expense
in terms of CPU minutes
or storage or whatever.
A lot of things scale with volume,
so it's a good thing to think about
when you think about your cost
structure, especially for those
variable costs we talked about.
Economies of scope.
You know, this gets into the idea of
vertical integration, of
doing all the value chain
of producing and delivering your
product.
Sometimes you get some economy
from that. Let's say, for example,
you have a distribution channel
you've built and you're selling a
product through it.
Well, maybe you can then sell
additional products through that
same channel.
That can be an example
of an economy of scope.
So are you going to be building
economies of scope in your business
that will help reduce
your costs and become an
important factor in your cost
structure.
So those are some of the things to
think about when you think about
your cost structure.
In your canvas.
Write down what are the key fixed
costs that you'll have in this
business? What are the variable
costs and what economies
would you expect to get as you
scale the business from
scale?
But also, what economies might
you expect to get from scope
as you expand the scope
of what the company does?
Those are the kinds of assumptions
that go into the cost structure
section of your business model
canvas. And of course, you're
putting those assumptions, those
hypotheses there, so you could go
out and test them.
Maybe by talking to people who
who built a similar business and who
can give you some feedback on
on what the actual cost structure
of a business like yours might
be. And that's our discussion of
cost structure.
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And remember, this is actually the
last video in a whole series
that walk through the entire
business model canvas.
So check out the entire sequence.
There's a link to the playlist right
below me.
And aside from that. thank you very
much for watching.